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March 18, 2009

Insurers Modify Annuity Benefits

Investors and advisors weren't the only ones affected by events in the financial markets last year. Insurers that sell variable annuities (VAs) also were forced to contend with the volatile equity and credit markets. Kevin Loffredi, senior vice president with Advanced Sales Corporation, publishers of the "Annuity Intelligence Report," points to several recent and ongoing changes in VAs.

As a general overview, VA benefits over the summer of 2008 underwent rapid change, says Loffredi, when VA providers were one-upping each other with step-up provisions, withdrawal rates and other features. Starting in late-fall of 2008 up until now, however, carriers began pulling back some of their more recent enhancements.

"The pace of changes has been hot and heavy since December and we expect this to continue up through the May '09 prospectus filing season," says Loffredi.

To put it into perspective, though, Loffredi notes the recent changes have been nothing like those seen early in the decade. In 2002, he recalls, there saw a mass exodus of guaranteed monthly income benefits (GMIB), and GMIBs from roughly a dozen carriers were cancelled. In contrast, the current changes are more of a scaling back. "Right now, perhaps carriers have realized they might have made the benefits too rich and realize market share at any cost does not work," he explains..

Despite the changes, Loffredi believes the pairing back by the carriers should have little impact on sales. Although some observers believe that higher prices might make investors reluctant to buy VAs, in Loffredi's opinion, fees are not relevant because there is value in the benefits: "Fees become an issue in the absence of value."

Brian Fenstermaker, CFP, with Envision Consulting Group in Westerville, Ohio, monitors VAs closely for his clients and prospects. He maintains a product matrix that tracks a wide range of VAs, and he began to notice policy changes when he credit freeze began late last year. In particular, he began to see reductions in GMIBs and guaranteed minimum withdrawal benefits.

"As the situation worsened, you were able to see some insurance companies reeling back those benefits, to move down automatic step-ups, or to reduce the number of automatic step-ups, or to possibly move from a guarantee base," says Fenstermaker.

As a result of the changes, Fenstermaker believes the industry is moving towards more standardized benefits. "What I think you'll see is over time is more of a homogenization of these benefits, because what's happening is everybody's facing the same constraints, so to speak, with low interest rates and an environment where volatility is taking over," he says." There are really no emerging leaders, except those companies that are the strongest companies with the strongest risk management."